A Beginner’s Guide to the Business Side of Freelancing

Jun 9 2010 by Chris McConnell | 43 Comments

A Beginner's Guide to the Business Side of Freelancing

Being a freelance designer entails more than just the act of designing. Master the business side of design and you’ll thrive. Neglect it and watch your business take a dive.

There can be severe consequences for those who mismanage finances, fumble along without a business plan or don’t understand clients.

Fortunately, this article will serve as a crash course for beginners who want to learn about the business side of freelance design.

In this broad overview, we’ll take a look at creating a business plan, choosing a location to work, determining a going rate, understanding financial information, the importance of insurance, obtaining clients, showing your portfolio, writing proposals, keeping clients happy, writing contracts, understanding copyright laws and finally, taxes.

Buckle up!

Business Plan

Business Plan

From the beginning, you should have a solid business plan in place. Some people spend more time planning what to eat for lunch than they do planning their business.

Running a successful business requires plenty of planning. The act of preparing a business plan will arm you with the knowledge you need to move forward efficiently and without any unexpected surprises.

Key elements of a business plan usually include:

  • executive summary
  • a description of the business
  • your market strategies
  • a competitive analysis
  • your development plan
  • operations plan
  • financial components of your business

If you just read that list and saw a few things you have never even thought about until now, you may be in for some trouble down the road. But it’s never too late to create a business plan. It takes time, but it’s well worth the effort.

A Google search will reveal a plethora of business plan templates to choose from, but a few of my favorite resources include:

Location to Work

Location to Work

Next on the list of things to do is choosing a location to work. Many freelancers work from home, but sometimes this can be confining (especially if you live in an apartment), but there are some alternatives.

Shared working spaces, such as Hive at 55 in New York, are becoming increasingly popular because they provide business essentials such as WiFi, a fax machine, a printer, copier machines, as well as conference rooms and human interaction.

Of course, if you have the dough, you can always rent some office space, but that might have to wait for a few years until your profits and client list have grown substantially (time to consult your business plan!).

Still, other alternative workspaces include coffee shops, which can sometimes be loud and crowded, and even public parks.

Figuring Out How Much to Charge

One of the most important things you will need to do when starting a freelance design business is determining an appropriate going rate. Some designers prefer to charge on an hourly basis, while others prefer a per-project fee.

You’ll need to do what makes the most sense to you. Check out these resources to help you decide:

In my experience, charging per project makes the most sense for large projects and for projects with a time requirement designers can accurately gauge, while an hourly fee works better for smaller projects and revisions.

Keeping Finances in Check

Keeping Finances in Check

Interpreting information about the financial health of your business is essential. There are three main equations that you need to familiarize yourself with.

1. Balance Sheet

The first is called a balance sheet. The balance sheet lists assets, liabilities and equity.

Assets include cash, accounts receivable (invoices sent out that haven’t yet been paid), fixtures, buildings, land, equipment, security deposits and other intangible items such as patents, trademarks and copyrights.

Liabilities include accounts payable (money you have been invoiced for), lines of credit issued by banks and mortgages.

Equity pertains to any monies invested in your business plus fiscal profits.

By comparing the balance sheet at any two points in time, you will be able to determine how healthy your business is.

2. Profit and Loss Statement (P&L)

The second equation is the profit and loss statement, which is oftentimes referred to as the P&L.

Your gross profit equals your revenue minus costs.

Your net profit is your administrative or overhead expenses (like salaries, office supplies and health insurance) plus depreciation and amortization subtracted from your gross profits.

3. Cash Flow

The last — but not least — of the three equations you need to know and understand is the cash flow statement, which determines your liquidity.

Understanding cash flow is simple. If your accounts receivable increases over a given period of time, you are basically providing credit to those clients and will have less cash on hand. On the other hand, if your accounts payable have grown, you may have more cash on hand but will end up owing more money.

Insuring Your Business

Insuring Your Business

Having insurance is the ultimate form of planning ahead and you need it because — let’s face it — things rarely go exactly as planned.

If you or your business runs into an unexpected situation (say your equipment is stolen or you find out you need to have a $150,000 surgery), your insurance agency will be there to help.

In some cases, freelancers working at home may feel that their renter’s insurance is enough to cover any losses from a catastrophe such as a fire or flood.

Legal defense can also be quite expensive and is yet another reason why it pays to have insurance.

Finding Clients

You wouldn’t have a design business at all if you weren’t able to bring in clients. Did you know that the best freelance designers are actually great salespeople? You may hate sales, but it’s a fact of life for freelance businesses.

Having said that, there are a number of places to find clients for your fledgling business.

Of course, you’ll want to have a great website or hosted portfolio (on places such as Behance), but there are also some "old school" techniques that still work nicely when it comes to snagging clients.

One such technique is to contact every ad agency or design studio in your local area because, as a freelancer, you are perfectly positioned to handle overflow from their business.

Another possible source of clients are local publishers such as newspapers or book houses.

Print shops often receive design work in which they don’t specialize in and so are happy to have a local freelance contact whom they can contract for help.

Leads can literally come from anywhere: grocery shopping, family, local business organizations or the phone book. Keep your eyes open and have a business card handy wherever you go.

Also, once you’ve completed a project, it doesn’t hurt to ask for referrals and a testimonial.

Presentation Matters

Presentation Matters

Solid presentation skills will help you win new accounts. Clients typically look for five essential items when evaluating your services. In order, they are:

  • Methodology and professional skills
  • Ability to deliver what the client wants
  • Ability to graphically represent the client well
  • Ability to provide a solution, not create additional problems
  • Ability to meet deadlines

So, if you are showing off your portfolio in a meeting, make sure that your are targeting your presentation to that specific audience. Whether it’s the nature of the work, the illustration or photography style or a specific market, make sure to keep it as focused as possible.

When it comes to your portfolio, it’s best to narrow it down to your top 10-20 pieces and to keep it as current as possible. The same goes for your online portfolio. The fact that you have unlimited storage space on your website doesn’t mean that you should put up everything you’ve ever designed.

Writing Requests for Proposals (RFPs/RFQs)

As your business grows, you’ll inevitably get approached to write up a proposal or submit a bid for a large project. This is referred to as a request for proposal (RFP) or request for quotation (RFQ).

Whether or not you should participate in a bidding war is another question. I’d say if you are a small 1-2 person team, bidding against larger companies may not be the best idea. It’s time-consuming and can detract from your regular billable time.

If you have the time and patience though, winning a bid can be like landing a whale — you can live off of the blubber for quite a long time.

Keeping Clients Happy

Keeping Clients Happy

Once you’ve built up a client base, you’ll need to work on keeping them happy. Many freelancers derive more than half of their annual income from repeat business.

The best way to make your clients happy is to sacrificially meet all of their needs and expectations. After all, nobody said freelancing was easy.

Don’t overlook the importance of what you say. Remember, a big mouth can land you in big trouble, so don’t oversell yourself.

Does this mean you have to wine and dine local clients? Well, perhaps. Not all freelancers like having meetings — that could be one of the leading reasons why they left the rat race in the first place — but sometimes meetings are required to cement the deal.

My best advice? Learn to go with the flow.

Most of all, always, always be honest with your clients. If there is a problem, you should let them know. Good communication will prevent problems in the future.

Contracts

A contract is a legally binding document that spells out the parameters of a business relationship. Things like deliverables, number of revisions, time frame and payment are all covered in a good contract.

Why use a contract? For protection, of course. If something goes wrong on the project, you will be able to point out in the contract exactly what you are accountable for.

Contracts are also great for preventing scope creep (when a client wants to expand the project for the same amount of money).

You’ll also want to spell out who owns the rights to what you design — you or the client?

For more on design contracts, check out these resources:

Dealing with Payments

Dealing with Payments

Part of running your own business is dealing with the collection of payments. In order to avoid potential hassles, a good rule of thumb is to get everything in writing including proposals, estimates, letters of agreement, contracts and schedules.

Make sure you have a payment schedule in place and make sure your clients understand when you expect to get paid. It could be once a month, up-front, upon completion or at a different set interval.

Before you do a single ounce of design work, I would always recommend getting a deposit. The industry standard is to collect 50% of the quoted amount unless the project is large.

To manage invoicing, I’d recommend using an online tool such as Freshbooks. It’s convenient for both you and your clients and makes keeping records a cinch.

Copyright Laws

Understanding copyright laws can be a bit tricky.

Let’s start with what is copyrightable. If you are the author of an original work in any tangible medium (such as literature, music, drama, graphics etc.) you can copyright that work. In fact, as soon as you create it, it’s copyrighted.

What can’t you copyright? Here are a few things that can’t be copyrighted:

  • US government property
  • ideas
  • methods
  • procedures
  • concepts
  • slogans
  • discoveries

If you own a copyright, you have the exclusive right to authorize reproductions, distribute copies to the public and prepare derivative works.

If anyone else wants to use these rights, they must first obtain your consent. If someone decides to rip you off by creating something similar, it may be hard to prove that you were the original creator, so it’s a good idea to fill out the copyright assignment form and record this with your respective Copyright Office.

Taxes

What are the two sure things in life? Everybody together now! Death and taxes.

I can’t offer much advice about death, but when it comes to taxes, you had better be prepared. Keep records of everything including income and expenses.

One thing you won’t mind keeping track of is write-offs. If you work from home, you can deduct the square feet used as on office. If you’ve already graduated from college and decide to head back for more, you could deduct those expenses. Professional equipment, travel and transportation can all be deductible so make sure to keep track of your mileage and receipts!

You’ll absolutely want to hire an experienced tax professional to help you sort through everything when the time comes. Also, if you plan on participating in the social security system, then you must pay the self-employment tax.

Got Something to Say About the Business Side of Freelancing?

If you have thoughts, additional tips, suggestions, and experiences to share, please do contribute in the comments below.

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About the Author

Chris McConnell is an entrepreneur, designer and author who co-founded the design firm Brandeluxe. He writes regularly on his blog, Freelance Review . You can connect with Chris on Twitter or LinkedIn.

43 Comments

Nathan Archibald

June 9th, 2010

A lot of good info in this article. Thanks for sharing.

Mike Ilsley

June 9th, 2010

Nice article. It’s so true that you need to think about all this stuff, which is a pain, since a designer usually wants to..DESIGN! But once the foundation is set up, it makes life as a freelancer a lot easier.

Rachel

June 9th, 2010

Absolutely brilliant article. Really informative, and definitely very helpful. Going to bookmark this to keep close by!

Jogos Gratis

June 9th, 2010

It’s easy to design and code websites but it’s very hard to take care of the business.
I really need to learn how to outsource the small aspects of the business and focus on the main aspects. There are days I can’t do anything productive because I have to fix small issues that an assistant could do it.

esses

June 9th, 2010

there’s a lot of great information here. things like contracts and taxes will bite you in the rear if you don’t plan for them.

i have to suggest that freelance designers skip the business plan. a business plan isn’t actually necessary for starting most businesses. if you’re not seeking funding, your time is better spent designing and not slaving over a business plan that you or anyone else may never ever look at again.

David

June 9th, 2010

Thanks for the good article. Especially since I am looking into starting a freelancing business.

Any specific advice for developers? I saw several things aimed mainly at designers, and I’m not a designer. And all the general advice was really good.

What are some good practices for working with other freelancers I’ve outsourced work to? Like if I got a job building a site for a goat cheese factory, and wasn’t provided a design for it. How should I manage outsourcing the design?

For that matter, how do I find good people to outsource work to? Everyone always says, “Network!” But I have yet to even find an way into the local web development community. I’m not sure there even is one. Where should I go looking?

Smashy Design

June 9th, 2010

Really good article. Thanks for sharing.
I have to do more to complete these stuff.
Looking forward to do so.

Thanks again
Cheers!

Amy

June 9th, 2010

This is essential advice for those starting out…like me. It’s overwhelming trying to figure out where to start and this is a fantastic guideline. Thanks!

Brian Jones

June 9th, 2010

Excellent article and thank you for the resources. Keep up the great work!

ddeja

June 9th, 2010

Generally good advices for every one who is starting it’s own freelance job. For me in Poland where i’m from if you want to work as a freelancer you need to be very good. You need to have a NAME on the market, great portfolio and tons of experiance. Otherwise you won’t last half a year. So taxes and business plans are the least of your problems. Sad but true.

Jae Xavier

June 9th, 2010

Planning to plan… There is too much of that out there.

89.2% of “would be entrepreneurs” end in the planning stages. Yes, do your research BUT get on the phone, start passing out fliers, sell sell sell. Just doing straight sales gets you moving forward.

20% planning, 80% executing.

Actions produce results and results tell you what to do next.

Aaron Moody

June 9th, 2010

Great read, thanks for writing this, and going in such detail.

Jordan Walker

June 9th, 2010

Great article for people who are starting out their own development freelance company.

sos media

June 10th, 2010

Nice article. I wish I knew all this stuff when I started 8 years ago! Thanks!

Aisha

June 10th, 2010

Excellent designs.Web design plays an important role.what we need is a solid and attractive web design for our website and that design must fulfill our business requirements..

Rosti The Snowman

June 10th, 2010

This is a really good article thanks.

I think the hardest part for me is still working out how much to charge a client.

Jordan Walker

June 10th, 2010

Great article for people who are starting out their own development freelance company.
Sorry, forgot to add great post! Can’t wait to see your next post!

Melody

June 10th, 2010

What an incredibly thorough article. And just in time, I’ve been researching the best way to keep track of my finances as an online entrepreneur and any little bit helps! Thanks!

Antoine Guédès

June 10th, 2010

Thanks a lot for this post!
I’m a young freelancer, so it’ll benefits me a lot.

Multyshades

June 10th, 2010

great article on this topic, very detailed & helpful, thanks for share with us.

Ryan Glover

June 10th, 2010

Great article. A lot of information that can easily be overlooked when you’re first starting out. Definitely be using a lot of the tips found here. Thanks!

Hive at 55

June 10th, 2010

I run the Hive at 55, we are a shared workspace and also resource for freelancers – we have helped connect freelancers with new gigs and offer workshops on many of the topics included in the article. Any New Yorker’s out there, I welcome you to drop in and check out the space. We offer a variety of flexible memberships that are all month to month with no commitment. Thanks for including us in such a great piece!

Keith Harper

June 10th, 2010

You don’t need a business plan to start freelancing – too much planning gets in the way of action.

Jacob Gube

June 10th, 2010

@Keith Harper: I think the key words in your comment is too much planning. I’m a firm advocate of Getting Real: getting stuff done and less talking about getting stuff done. But at the same time, a solid plan (a) shouldn’t take that long to put together and (b) can pay dividends in the long run.

I could take Six Revisions as an example. This all started in under a day, no planning, and it’s doing pretty well, I can’t complain. But for my next project, I decided to invest a little bit more time in planning (Design Instruct), and as a result, its speed of growth was much faster than Six Revisions in its earlier months.

Planning is good. Over-planning and worrying is very bad and counter-productive.

Kendrick Disch

June 10th, 2010

I think readers should be careful not to confuse what a business plan is.

‘A Business Plan’ is a particular document that outlines and provides details about the plans, financials, structure, and market research pertaining to your companies overall goals.
This is overkill for most freelancers and even many small companies.

However, almost everyone should have “a plan for your business”! I think as a freelancer you should write down your goals and outline your step by step plan for how you are going to reach those goals. This is a living document that will change over time. That’s ok! The idea here is that you are thinking about what you want and then thinking about how you’re going to get it and writing it down. Ultimately no one has to see it except for you!

Mario S Cisneros

June 10th, 2010

Chris,

Very comprehensive article and all the major points were covered, nice job! Only one thing I’d add is to consider incorporating your business, which provides added security against litigious clients.

-MC

JonathanB

June 11th, 2010

Ty for this great extensive and very useful post!
Nice job covering all the major spots :)

Dean

June 11th, 2010

Hey Mr. Businessman- look out for the giant porcupine quills!! OH NO TOO LATE!! :(

Jennifer R

June 12th, 2010

Seems that becoming a free lancer is very hard than just a designer :(

Maidstone

June 12th, 2010

It is always nice to read your articles. Strange, but today I was told by my bookkeeper to make a detailed business plan as well… and though most of us hate paperwork, we have to do it :(

thank you for sharing

Rolf

June 13th, 2010

The step to be a freelancer is really difficult.

Very nice Post, Thanks !

FactFile

June 14th, 2010

Your point about copyright is an important one. Clients seem to think that, once they have paid the bill, the copyright automatically is theirs and they can use our words/designs etc wherever and however they please. I usually put something about this in my terms and conditions when I send in my quote – just to make it crystal clear.

Chelsea

June 16th, 2010

You might find these freelance design contracts and templates posted at Sessions College for Professional Design useful:
http://www.sessions.edu/Design-Career-Center/Design-Tools/Freelance-Design-Contracts-Templates.asp?fmid=0

Keith Harper

June 16th, 2010

@jacob sure – you’re absolutely right. Make some plans, but don’t spend too much time on them, because its guaranteed they’ll change anyways … I agree with what you’re saying.

Adrian

June 17th, 2010

A great looking article. I haven’t read it all yet, but i’ve book marked it for further reading. Anyhow… back to work :)

Bradley

June 21st, 2010

Nice article, and some great tips. I have just been brainstorming trying to figure out how to attract more clients. This has some great starting points.

One thing I would like to mention, don’t underprice yourself. I have been doing this, and a couple of potential clients have decided to go with a firm who was charging a much higher rate than me. I think part of it is I was undervaluing my worth.

Taroubou

June 22nd, 2010

This is good post, I will keep this in mind. If you add more video and pictures because it helps understanding :)

Yeri Creative

June 26th, 2010

I don’t know if some one mentioned this , but after making your business plan – you should make your company legit by either incorporating it or becoming an LLC

nick

July 5th, 2010

I don’t think this covers too much planning because someone starting a web design start up company can use this as well as freelancers. I’m starting a company opposed to freelancing, because I do plan to expand to an office and hire people in the future other than just doing it out of my living room like I am now, as a freelancer.

Emanuele

July 9th, 2010

Hi, I suggest this link
http://www.vsizer.com/index.php?action=show&idComparison=19160
where you can vote, comment and find out what the web thinks about Design Agency vs Freelance Life

Frisco Plumber

February 8th, 2011

Great information. I got lucky and found your site from a random Google search. Fortunately for me, this topic just happens to be something that I’ve been trying to find more info on for research purpose. Keep us the great and thanks a lot.

Elazar gilad

October 7th, 2012

A great article. for those peopole who are starting out their own freelance company

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